Brazzil
Economy
August 2002
Casino Real
In the eyes of its foreign creditors, Brazil's
most important spending concern has to
be to repay its massive debt,
estimated at $344 billion.
Norman Madarasz
As North American tourists and media people fly into Rio de Janeiro, "Garota de Ipanema" can't help ringing in their ears. The Tom Jobim classic, just as the bossa nova (or new beat) samba-jazz mélange he crafted, sounds the eternal music of South Side Rio de Janeiro. Beaches stretch out, growing longer in succession, and interrupted only by whale-finned mounts sprouting sharply out of Paleolithic times.
The more curious among the northern folk turn away from a horizon, once streaked by the pirates and buccaneers, covertly coveted by the British and French. In shifting sights, this tourist or that journalist first end up seeing a mountain range carpeted by Rio's infamous favela slums. Don't let the tarnished picture-perfect tropical scene bother you. Many favelas are beautiful in their own right.
If you were swept up by one of the hand gliders at fashionable, though polluted, São Conrado beach, rising up over the coastal range, you would begin to surge above the extremities of the North-West Zone. Down below, conditions of squalor concord only remotely with the surfing seaside breeze. Hotter than the coast, pagode and (Brazilian) funk music pump through lusting sweetness only more deceptively to bring contrast to the violence of daily living. For the ears of whom the reality principle is noise, Villa-Lobosian dissonance would now be clashing with the smooth timber of Jobim's "Wave".
As stiffly as the wind repels courageous swimmers in Ipanema, Brazil's progressive movements are being turbulently rocked as the tide of presidential elections slowly surges higher. On the national and state levels, Brazil is now going to have a chance to truly and really embark upon a long-term endeavor to curtail the ebullient effusion of endemic poverty. Polls for October's presidential election show Lula, the head of the Workers' Party (Partido dos Trabalhadores, or PT), as holding a strong lead over the government candidate, José Serra, from the PSDB (Partido da Social Democracia Brasileira—Brazilian Social Democracy Party).
Until the recent June 24 CNT/Sensus poll published in Brazil, Lula solidly led all his opponents for the second month running in not just the first, but the second round of elections—prior to forming any alliances. The July 16 Ibope poll confirms Lula's still ahead at 33 percent of voter intension. He is seconded now by Ciro Gomes, the charming though gentle candidate of the Worker Front (Frente Trabalhista), an ambiguously center-left populist party still undecided about joining ranks with deposed former president Fernando Collor de Mello. According to these polls, Brazilians, for whom voting is compulsory, still favor the promise of real progressive policies, instead of the mirage of the populist maze.
Luiz Inácio Lula da Silva has been in this position before. Emerging as an autoworkers trade union leader in the late 1970s, he has been at the helms of the PT ever since its inception. Though failing to capture the title in three successive presidential elections, he was ahead in pre-election polls for each of them. He may have lost in the second rounds to shifting alliances, but over the years his Party has moved into running towns and states throughout the country. Showpiece cities like Porto Alegre and states like Rio Grande do Sul are both governed by PT leaders at the municipal and state levels. In addition to the city of São Paulo (South America's largest city, with a population of 11 million people), the state of Rio de Janeiro itself, headed by Ms. Benedita da Silva, has turned to interim PT governance, at least until her expected re-election this fall.
Even more, the PT has the allure of an honest party. Deeply averse to the populist stances so typical of Brazilian politics since the 1964 coup d'état, it has developed a solid record of public administration, attention to culture and research, and commitment to middle and lower class concerns and aspirations regarding education, health, purchasing parity and policing. Moreover, once in Brasília, the PT plans to focus on implementing an efficient, which means real, tax strategy in order to curb the flight of capital, often illegally resting in offshore accounts. Internationally, through the exposure given to it from the two Social Economic Fora in Porto Alegre, the Party has come to congeal the hopes of a fractured and betrayed Left, whose alternative for citizens of G7 countries has been increasingly falling into simple, albeit vocal, abstentionism.
International Spotlight
The international left has not been alone in focusing attention on the PT. Despite the PT's good work on the local level and its generally positive outlook, the pre-electoral context in Brazil has become increasingly dramatic. The critical situation affects all of the so-called emerging markets in the global capitalist system. When they are not draped in the epic of Brazil's brilliant surge toward the World Cup title, North Americans may have been reading of Brazil's many social problems in its highest profile dailies and periodicals. In the perception of an average American whose little knowledge of its gigantic southern neighbor relies on what the media affords to inform, Brazil fits the bill of a tropical land being torn by innumerable problems.
These North Americans will have sweated from the news of the triple-type dengue fever outbreak and its toll on tourism. They will have trembled at the stories of tourists being mugged and, worse, shot while visiting the Cidade Maravilhosa (Marvelous City, as Rio is sometimes called). They will have been shocked to hear about the drug traffic related violence, and brutal murder of journalists and civil servants. Positive stuff. And unless they are fairly wealthy, these North Americans will have probably skipped over the financial pages with their daily mises-au-point of how the Brazilian currency is faring.
This is primarily where the injustice begins. In spite of its exoticism, few countries get as bad press in North America as Brazil. By contrast, were one to attentively follow the Financial Times, its pages would revealingly deliver in hallucinatory detail the real political pattern of the northern disruption of southern economies. Whereas northerners figured out long ago that Lula is the next candidate to be crushed by capitalists, these same readers may not even get very close to hearing about Lula's fundamental positions. The northern establishment press still wallows in the half-hearted argument on how socialism only works well on paper—while the capitalist system moves into yet another of its predicted and predictable crises, perhaps the only laws by which the system as a whole really abides.
So what are some of Lula and the PT's positions? The fact that the question even has to be asked carries an annoying air about it. In the countless dailies and weeklies filling the stands of Buenos Aires, Rio de Janeiro and São Paulo, any number of articles by northern political and economic analysts and intellectuals are translated. The circulation of northern ideas gives a particular advantage to being in a peripheral country, though it is precisely this advantage that accounts for its sidelining.
It is symptomatic that Anglo-American global dominance has little of the same concern for what its multilingual counterparts are saying and thinking. Even Rome—the historical model currently favored as a precursor by the current empire's advocates—had absorbed Greek and Judaic thought and culture. But the triumph of English, as the Economist recently touted, really does point to world dominance by other means.
On June 23, during a question period on a Brazilian television station, Lula was asked to describe the PT's economic platform. The question was set against the background of the infamous imperial summons addressed to him by the June 13 editorial of the Financial Times. In a professed move to calm foreign investors, the editorial was penned after the real, Brazil's national currency, had once again come under attack.
After seeking to discredit the wild speculation of a future PT government's reluctance to abide by scheduled IMF (International Monetary Fund) loan payments, the FT's editors wrote: "the PT should be prepared to make an early announcement about the composition of its future government team, possibly including some figures from outside the party, to bolster confidence." The image could not be more perfect of the tactics and interests of market players in the faceless global economy. Since then, all eyes and ears have been on Lula and his promise to make a declaration on how the party is reacting to the crisis.
Soros, FT and the Real
First the crisis, then the PT. But prior to all that, a remark or two on the FT. To its credit, on May 1st (don't worry, wit has never failed a cynic) the Financial Times editorial came out in full support of the strengths of the Brazilian economy. It decried the nervousness being spread by bond risk rating agencies, such as JP Morgan with their Embi+ index, as well as other firms like Moody's. It did so only days after featuring a highly favorable article on current president Fernando Henrique Cardoso, despite the fact that Cardoso is in the last months of his two terms at the helm.
Cardoso's brainchild, the "Plano Real", now eight years old, established him in the favors of neo-liberal capitalist economic analysts and planners. The plan pegged the Brazilian real to the American dollar, managed to squash the spiraling inflation that was turning the economy over throughout the early nineties, and attracted considerable foreign investment in consequence. Nonetheless, Cardoso's real plan was undone in the lengthy wake of the debacle that flattened the east-Asian economies. The pressure was such that the currency was unpegged, following which the real was devalued to half of its worth.
In fact, the Financial Times has conducted itself not unlike the way one of its gurus, the Hungarian-American financier George Soros, had back in the dark days of 1999. Shortly after the crash of the São Paulo stock exchange, on January 13, 1999, Mr. Soros spoke out at the Davos meeting for investors to trust the Brazilian economy. In a gesture which has made him the country's single most important foreign creditor, Soros stepped in with a "wall of money" to continue to resource Brazil's capital reserves as they came under attack in a cat-and-mouse game of increased interest rates on both lending and bonds.
Thereafter, President Cardoso shocked local business circles by naming Armínio Fraga Netto, the head of Soros's $20 billion Fund Management, to take control of the Central Bank only two weeks after naming the economist Francisco Lopes to the post. Since its first symptoms were sighted on January 29, the attack on the real threatened to empty the nation's capital reserves.
As it was Soros' money that primarily bolstered Brazil's fledging currency, the seat of the Central Bank was given to one of his closest associates. A Ph.D. from Princeton and former vice-president of Solomon Brothers, Fraga had been one of Soros's leading financial managers. If there can be anything taken at face-value in pronouncements made by Soros in his much discussed writings, he would seem to believe that the ethics of speculation are redeemed if their means are noble ones.
Helping to uphold massive economies, for Brazil has the world's ninth GDP, is part of the Sorosian philanthropic project. Whatever the ethics of his principles, since 1999 the real has been generally held within a four margin point range, fluctuating from 2.30 to 2.70 US dollars. After a rocky spring in 2001, and in the market turbulence after 9/11, the real had been sitting comfortably at around 2.5. Then to celebrate its eighth anniversary on July 1, 2002, trading pierced the 2.9 ceiling, a historic low.
Following his appointment to head the Central Bank, Mr. Fraga claimed to have grown autonomous from Soros. Two weeks ago however, Mr. Soros publicly declared that it would be disastrous for Brazil were Lula to be elected president in the fall. And, on June 26, he issued a notice on how he once again stands ready to "save the Brazilian economy". According to an InterPress report from 1999, through his persistent investing Soros had become the Mercosul's strongman. But there has been little news of the state and/or movement of his assets in the South American free-trade zone since the collapse of the banking system in Argentina.
No International Plot
What can be said with relative certainty is that the current crisis has no single cause to it, though it is rooted in microeconomic interpretation of Brazil's future. The mouthpieces of investment firms, namely bond risk agencies, are laying the blame primarily on future political uncertainty linked to the strong showing of the PT in projections for October's presidential elections. These firms are both Brazilian and international, so the thesis of a global foreign conspiracy should not be pursued.
Still, the Financial Times has not hid its distaste for the PT, and it has been extending the carrot to its economic team to move away from the social commitments, which otherwise require considerable public spending. For in the eyes of its foreign creditors, Brazil's most important spending concern has to be to repay its massive debt, estimated at $344 billion.
When creditors fear that a leftwing government may seek other solutions than to prioritize the payback, as in a de facto sharing of needs, risk agencies begin to turn the heat up on the emerging market index point rating system. For example, JP Morgan's Embi+ evaluates the interest rate offered on C-bonds in emerging markets. C-bonds allow national governments to repay debt by offering investors the chance to "buy" debt, in exchange for a handsome compensation. The higher the interest percentage has to be in order to attract investors, the higher the rating. The index baseline is U.S. Treasury Bonds, currently considered by the market as risk free. With economic instability comes a high rating, like Argentina's, currently topping the list. The inverse works as well: by increasing the rating, economic instability grows.
Faced with pressure from Brazil's national and international banks and creditors, the PT leadership decided it had to act. When questioned as to its economic policies, Lula answered: "the PT's platform is first of all to fight misery and hunger. This is what the PT is going to do." He went on to add that all of the PT's economic decisions will flow from this commitment. But most striking to market ears was his statement emphasizing that, if elected, the PT would abide by the 3.5 to 3.75 percent primary surplus rate on Brazil's GDP as an indicator of the type of social spending the government should conduct.
Furthermore, he announced his vice-presidential candidate, the head of the Liberal Party (PL), Senator José Alencar, a successful entrepreneur who speaks for a certain sector of the business community, while embracing a Fordist-model political agenda toned with evangelical religious hues. The PT rank and file has voiced growing pains regarding the alliance. Yet in front of the cameras, the leaders spoke of a deep alliance between workers and entrepreneurs in a mutual commitment to "valorizing workers before capital", in Senator Alencar's words.
Embi: Mere Opinion Tracer
By now, North-American tourists should be relieved. Rio and Brazil will be attended to. Not only is the PT going to work on reducing the widest gap between rich and poor found in a wealthy nation, it will especially make the streets of Copacabana safer for them to stroll. Brazil's GDP pales terribly with its standing when translated into per capita terms, while its place on the purchasing power parity (PPP) index spirals downward to 83rd out of the 204 countries listed (source: World Bank Indicators database for 2001).
So then why, one might ask, was Mr. Paul O'Neill, Secretary of the US Treasury, quoted by the Financial Times, on June 24, 2002, as adamantly asserting that the current pressure on the Brazilian real "is driven by politics. It's not driven by economic conditions"? Paul O'Neill, as any law-abiding American citizen should expect, is entitled to his own personal political opinion. But the fact that his word towers over IMF policies on loan allocation changes the matter considerably.
If O'Neill is right, then the fact that Brazil is under financial attack has just about nothing to do with the Embi+ index. Rather, the Embi+ turns out not to be an objective measuring gage at all. It works more as a marker of feelings. And as anyone knows, there's nobody moodier than a creditor.
The Embi+ plots a mood curve and a jumpy one, to be sure. For every time the PT manages to convince another sector of business that, indeed, it is now time for Brazil's opposition to assume power, that is if the people so chooses, the risk curve split ends into the sharpest of peaks. Which is why the Embi+ emerging markets index, despite its pseudo-scientificity, is not even a marker of subjectivity. It traces opinion, and a limited and narrow self-interested one at that.
The next thing the public will be told is that the index works as an echo of the way investors feel about the American market, that with each new corporate corruption scandal showing the real nature of American neo-liberal capitalism, Embi+ marks the way emerging markets will be the ones to sweep up the consequences. For when cash needs meet up with the structural instability of short-term capital flow, no resting place is sacred.
Notwithstanding the dramatic tone, it would not be outlandish to profess such claims when considering the fine performance of Brazil's economy. President Cardoso has confirmed that the economy is running well, with expected 2 to 3 percent growth this year—provided the real not falter into lost ground against the US dollar, in which case expectations would nose-dive to barely 0.5 percent. (This figures do not raise any questions about the accounting standards on capital expenditures lying behind the purported 6.2 percent quarterly growth result in the U.S., but that's another story for economists to better inform us on with clarity and conviction.)
On June 24, after opening the Rio + 10 (Earth Summit), President Cardoso advised the press to heed the words of Alan Greenspan, head of the Fed, and Stanley Fischer, deputy executive director of the IMF, who have both declared that Brazil's economic stability is very solid, and its finances solvent. "We do not have the same problems as other countries do. We have to pass on a message of confidence to everyone, including what is said regarding political questions," Cardoso stressed. A few days later, the President congratulated Lula on accepting to favor the primary surplus rate.
Now, is anyone surprised at how little these statements have calmed the currency casino?
Once again, one need not quote Mr. O'Neill, nor Joseph Stiglitz for that matter (interviewed in the Folha de São Paulo on June 30, 2002), to smell the foul putrescence speculators leave in their dirty play. Were there appropriate laws in place for controlling the fine art of `investing', speculators would at least be criminally accountable for the squalor to which they subject emerging markets through their globalized casino. As it stands, barely a silhouette is cast on their shadows.
How then does a Party maneuver when it seeks to pass programs intent on making life more livable according to northern standards for the citizens of this powerhouse of a country?
Economics of Distaste
This is not the place to deal with descriptions of misery and the narcotraffic violence that have come to fill in the social void left gapping through years of military dictatorship and oligarchic rule. After all, this article is meant to be a contribution to economic analysis in the North American style. There's no place for the vivid and putrid poverty amid the world of reeling numbers and the smooth whisper of crisply rubbed cash as it spins through the bill counter.
Nothing obliges anyone to hear of the 15 daily murders afflicting Rio de Janeiro state alone, as drug traffickers—Rio is a major pivot for the national and Colombian drug and arms trade—begin to wage war against state institutions as the latter improve the efficiency of their combat against this poverty-related, if not induced, scourge.
Added to the pressure on Brazil is its neighbor, Argentina. One of the richest countries in the world only a half century ago, with its pegged peso-to-the-dollar policy, it most recently stood as an exemplary case in the IMF's eyes of an emerging market. Following collapse of its banking system in December, the country is now undergoing pauperization, with the barter system returning to the most fortunate sectors.
Advocates of globalization, however, have repeatedly explained how neither the remoteness nor proximity of economies stand alone as regulative factors of instability on a national economy. The economy has become global through the power of information superhighways—which is how capitalist advocates fed the good news message to gullible souls with eyes at least open enough to catch a gaze of those getting rich from options in the nineties. But remoteness did bring its ills, too, as any materialist law could predict. It was, after all, Russia's defaulting on its debt in 1998 that led to the crash of the São Paulo stock exchange (Bolsa de Valores de São Paulo—Bovespa) in January 1999, the key event leading up to the real's devaluation.
Brazil's economic policies have had almost nothing to do with Argentina's apart from once being its leading trading partner. The fact that the IMF purportedly did not foresee the gravity of the Argentine collapse may not make their reassurance regarding Brazil particularly reliable, much less reassuring. So, perhaps Paul O'Neill is really right to believe that "throwing the US taxpayers' money at political uncertainty in Brazil doesn't seem brilliant to me". Which is why he informed the Bloomberg network that he will oppose additional IMF assistance to Brazil.
Mr. O'Neill, just as the Bush Administration, has one outstanding merit. Regarding matters of taste, they say it like they feel. Lula is not the president's favorite, who could imagine he would be? The problem is that the US's own economy is not performing along the good-will lines of American capitalism either. And the market friendly neo-libs in Brazil see that as clearly as they feel the pinch on their pocketbooks because Anglo-American financial establishments are stirring around the Brazilian debt treasure, ensuring that if Brazilians do end up paying it back, they won't before paying more.
This is how the current crisis has come to a head. Anglo-American financial establishments, risk agencies like JP Morgan in particular—they were soon joined by Lehman Brothers, Morgan Stanley and Moody's—all buoyed by their main press organ, the Financial Times, claim to fear the PT's attitude toward Brazil's huge outstanding debt. The PT, in the voice of Lula himself, has said now that, if elected, it would respect restrictions on public spending. Moreover, it would not see its arrival in office as a break with the previous government.
Still, the North American tourist should be aware that the debt is a remnant of a series of governments that successive American administrations supported to the point of providing military and intelligence back-up to install, implement and maintain a network of regimes meant to destroy the growing South American popular revolt in the 1960's. This coordinated plan, codenamed Operation Condor, bolstered the two decades of military dictatorship Brazil lived under from 1964 to 1985. After presiding over several boom years, but then under pressure of a liberal capitalist uprising, the dictatorship handed power over to a democratic process still largely directed by regional oligarchies.
With a strong dollar, Brasília could move swiftly to repay its outstanding debt. And this is a key point to Cardoso' self-defense in this crisis that the debt is largely due to the policies of previous governments. With the global stock market crisis begun in 1997, which was actually an effect and not the cause of the global currency crisis sparked off back in 1992 by George Soros' attack on the British pound, Brazil's payable debt increasingly seems to recede on the horizon as the value of the local currency grows ever weaker.
Brief Celebrations
In June, the IMF agreed to lend Brazil $10 billion in relief aid. In addition, it lowered the ceiling of its federal reserve to $15 billion from $20 billion to let the government bolster the real. To top things off, the federal government in Brasília has been allowed to adjust its primary budget surplus rate from 3.5 to 3.75 percent, which will also apparently lead to alleviating the brutally high interest rates on loans, which are stifling local businesses.
These measures may or may not prove to be effective in this latest round of Casino Real. But its costs to the population are high. As I write, throngs of Brazilians are gathering below behind Candelária Cathedral, downtown Rio de Janeiro, to greet the World Cup pentacampeões. The Selection will be weaving its way down Avenida Presidente Vargas, then try to veer right through a barely navigable human sea onto Rio Branco and onward to Flamengo and Copacabana.
All Brazilians sense, however, that once the festivities are over, their true struggle lies in dealing with the behavior of creditors and how speculators will take advantage of the fluctuating risk rating level. On June 28, Brazil returned to being the third most risky nation to invest in, now behind Nigeria as well as Argentina. Yet one week prior, it held the number two spot.
There is nothing to suggest the struggle will be easy whatever the outcome of the presidential elections. France has not escaped a major drop in the CAC 40, even though Chirac managed to bring in his squad at both the presidential and prime ministerial levels. If trigger-happy speculators steered PT voters to what they claim to be steadier ground, recall that Argentina's ex-president de la Rua was about as close to the street as Mount Aconcagua.
Well before Brazil's semi-final World Cup match against England, the Financial Times, perhaps enjoying some vengeance on their team's wilted performance, smirked snidely at how Brazil's risk rating would be adjusted positively depending on whether victory was finally secured. This type of cynicism is what tarnishes the good-will tone of the May 1 and June 13 editorials.
Kenneth Maxwell, the distinguished author of the essay "¡Adios Columbus!" and unabashed Brazilianist, has pointed out how it would be erroneous to believe that Washington had their relationship with Brazil all worked out. Despite recurrent attacks against Brazil in the U.S. Congress, and with Secretary Colin Powell looking for something constructive to do by denouncing child prostitution and labor, exploitation of the Amazon rainforests and commercial piracy as ills profoundly setting the countries on opposing courses, Dr Maxwell believes there not to be a coherent agenda. And with every new protectionist gesture concocted by Washington, the FTAA (Free Trade Area of the Americas) is becoming a distant memory—all the better as even Cardoso would contend.
On the other hand, if Dr Maxwell has had to remain pessimistic on the future of Brazil's relationship with the North, the "rocky times" he has referred to in the pages of the Folha de São Paulo has much to do with the debt treasure as only bond and financial risk agencies can smell one. Nobody ought to think Maxwell as being too economically deterministic. Just as economics and management studies have co-opted the very principle of how to organize social groups and collectivities, so also have economists co-opted the political process. It is with the awareness of this backdrop that Brazil's victory ought to be hoped for on many fields more than that of futebol.
The staccato twitch of the pandeiro's cupped cymbals recedes and parts to greet the voice of Nelson Sargento. A living samba legend from Mangueira mountain in Rio's North Zone, Sargento sang to Lula three weeks ago during a meeting between the artistic community and the PT executive: `Don't let Brazil's culture go to waste, Lula, don't let it'. Being deprived of the acute sensuality of a beautiful Brazilian samba back-up vocalist should not be a reason to fail to passionately join in with the refrain.
Norman Madarasz holds a Ph.D. in philosophy from the University of Paris. He is editor and translator of Alain Badiou's Manifesto for Philosophy, published by SUNY Press in 1999. He writes from Rio de Janeiro, and welcomes comments at normanmadarasz@hotmail.com
The first version of this article appeared in CounterPunch on July 2, 2002.
